DIY Debt Payoff #3

This is the third post in a short series providing a step-by-step guide to creating and executing a do-it-yourself debt repayment plan.

Step 1 & 2 Review

Post #1 of the DIY Debt Payoff series described the steps for laying the foundation for a self-made debt repayment plan: Contact each of your unsecured debt creditors and ask for relief. In Post #2, we created a plan of attack: Figuring how much to send each creditor monthly to get the biggest bang for your pay-off buck. Remember that we’re working with an example in which you’ve got $400 you can dedicate each month to your debt payoff plan.

Overlimit or Past Due?

To keep things simple, I’ve so far not factored into this do-it-yourself debt payoff plan that some of your accounts may be past due or over the limit. In either case, you’re likely paying substantial monthly penalties, so you need first to direct as much spare cash as possible to those accounts to get those pounding penalties turned off. Once you’re not paying penalties, that’s more money you can use to repay debt!

Instead of immediately jumping to the payment plan described in Post #2, start your payoff plan by 1) sending the minimum payments to all accounts that are not past due or overlimit, and 2) sending the entire remainder of the $400 you’ve dedicated to monthly debt repayment to accounts that are overlimit or past due, regardless of APRs.

If You Owe Collection Agencies or Medical Providers

For debts with collection agencies, medical providers, and certain other creditors, typically there’s no minimum monthly payment (and often no interest charges). To come up with a monthly payment to roll into your debt pay off plan, do this:

Get an idea of how many months it will take to repay all the debts in your plan. If you owe a total of $10,000 spread among several creditors and can afford to pay $400/month toward this debt, then it’s going to take roughly 25 months to pay off your debts:

→ $10,000 ÷ $400/month = 25 months

It’ll actually be a bit longer because of interest, but 25 months is close enough for this purpose.

Plan to pay off any debts with no minimum payment requirement in about the same timeframe. So if you owe $2,000 to a collection agency, your plan should include a monthly payment to the agency of $80:

→ $2,000 ÷ 25 months = $80/month collection agency payment

Okay, now back to the whiteboard example used in Post #2, except now I’ve added the $80 collection agency payment. Notice that this new $80 payment, when added to the minimum monthly payments for all but your highest APR account (Capital One), makes a subtotal of $335. That leaves $65 of the $400 you can afford for monthly debt payoff to send to Capital One.

But what if the Capital One minimum payment is more than $65? Easy: Cut the $80 payment to the debt collection agency by enough to allow you to make Capital One’s minimum required payment. In short, do what you have to do to make your plan work.

Next and final DIY Debt Payoff post: What do you say and do if a creditor insists the payment you’re sending isn’t enough??

Tweeters of the world, unite!

Best Way to Repay Debt

I recommend the nonprofit, registered charitable organization Consolidated Credit Counselling Services of Canada for help to Canadians with budgeting and repaying debt. For a free review of your situation, call 1-844-257-5848 or visit this website.